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Glowing Growth Story

Superior market share, and an ever-growing home care business makes prospects bright

Profile
Established in 1983, Jyothy Laboratories Ltd (JLL), started as manufacturer and seller of liquid fabric whitener. JLL now markets a range of FMCG brands such as Ujala, Maxo and Exo among a number of offerings with a pan-India presence and exports to 14 countries.

In December 2007 the company came out with an new issue at Rs 690 which was over-subscribed 45.41 times and was listed at Rs 799 per share. In March 2009 it entered the laundry business through its 75 per cent subsidiary, Jyothy Fabricare Services Ltd (JFSL). The 26-year old is now an Rs 400 crore company.

Promoter
JLL was founded by M.P. Ramachandran. The promoters hold 69.68 per cent of the total paid-up equity share capital. Public shareholding is 30.32 per cent, of which 24.10 per cent is held by institutions.

Investment Rationale
Surge in Home Care Profits
JLL’s Home Care division, made up of Maxo mosquito repellant,  contributed 44 per cent of the FY09 revenues — 39 per cent in the previous year. This increased contribution to revenues was primarily due to declining raw material prices and withdrawal of special offers to consumers which caused Maxo’s profits to increase 170 per cent.

Ujala Shines
Ujala Supreme Fabric Whitener, JLL’s flagship product, has a lion’s share of the Indian market (85%) in this  segment. Ujala witnessed a volume compounded annual growth rate (CAGR) of 13 per cent through FY05-to-FY08 and a pricing CAGR of 11 per cent. Going forward, due to lack of competition, Ujala’s market dominance is likely to continue with estimated volumes expected to grow 8 per cent through FY10E-11E.

Limited Capex & Higher Cash Flow
In FY08, JLL’s capacity utilization stood at 16.1 per cent for its soaps & detergents portfolio and at 66.7 per cent for its home care portfolio. This was well within the installed limits. There should be no need to augment installed capacities through FY10E-11E, which will result in free cash flow per share of Rs 5.6 in FY10E and Rs 8.5 in FY11E. Furthermore, the company is expected to end FY10E with net cash of Rs 1.2 billion, which constitutes 15 per cent of its current market capitalization.

New Business
In March 2009, the company had acquired Snoways, an economy-class laundry chain, through JFSL. It has already added eight additional outlets to the 16 it originally acquired. The company has announced the launch of its own collection and delivery centres (CDC) called ‘Fabricspa’ for its premium clientele in June 2009 with an initial cost of Rs 40 crore. JLL further plans to open 20 more outlets with facilities such as changing rooms, wash rooms, and tailoring across multiple cities. It also plans to start a 60,000 sqft main service center with initial cost of Rs 350 million of which Rs 200 million will come by way of new equity shares.

The laundry business will positively influence the valuation metrics of the company’s core businesses too. It plans to tap the institutional business segment such as airlines, hotels etc. where it sees a huge potential.

Risk & Concerns
Concentration of Revenue
Three major brands, Maxo, Ujala and Exo, account for most of the revenue. Being a mature product Ujala is unlikely to contribute much to profit growth in future. Exo is sold in South India only and JLL wants to take it to the national level. That would mean additional advertising spends which might squeeze the bottom-line. Similarly, it wants to take Maxo to the high margin segment to drive volumes. But biggies like Godrej are already present there hence, both the competition and the additional ad spend for visibility will squeeze margins in the near term.

Raw Material Prices
Raw materials comprise 60 per cent of the total costs of the company. In Q3FY09 a fall in raw material prices had helped the company increase its gross margins by 33 per cent y-o-y. But any increases here can dent the profitability of the company.

Valuation
JLL reported buoyant FY09 numbers recently, net sales up 38 per cent, EBITDA up 102 per cent, PAT up 195 per cent y-o-y,  led partly by its home care business returning to profitability. Furthermore, Ujala’s market dominance in whiteners and Maxo’s positive EBIT are expected to drive a sales CAGR of 30 per cent and earnings CAGR of 25 per cent through FY09-11E. Its valuation is the cheapest in the FMCG sector — peers like HUL and Colgate are available at 21x and 33x FY10E P/B, JLL trades at 2x.

At CMP of Rs 106, JLL trades at 13.8x of FY10E EPS. Value unlocking in the company’s laundry business and rising return ratios (FY10E RoCE at 15 per cent) will influence the stock valuations positively. 

WI Take
With lower-than-average valuations and an enviable market dominance, Jyothy Laboratories is certainly worth a look in the FMCG space

The article appeared in the July issue of Wealth Insight magazine